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Wednesday, June 27, 2012

Last week, the Indian rupee touched an all-time low of Rs 57.32 against the dollar. While the Eurozone crisis is buoying the dollar, a combination of several domestic factors have weakened the rupee. In this quarter alone it has lost more than 12% against the dollar.

India Inc had got some relief when the rupee moved up from Rs 53.07/dollar to Rs 50.88/dollar in the fourth quarter of 2011-12. However, those gains have been wiped out completely because the depreciation in the April-June quarter (from Rs 50.88/dollar to Rs 57.16/dollar) has been far greater. So don't be surprised if several companies report forex related mark-to-market losses in the first quarter of 2012-13.

Differentiate between real and notional

Before you press the panic button, you need to understand how forex losses impact a company's bottom line. "Forex related losses have differing impact on different companies," says Dipen Shah, head of fundamental research, Kotak Securities. The forex losses reported by companies can be 'real' as well as 'notional'. Instead of clubbing all such losses under one head, you need to differentiate between the two. Most of the companies that report forex related losses (and gains) are exporters who have taken positions in the forex market to hedge their future dollar earnings. For example, IT companies have forex related gains and losses in almost every quarter (depending on the rupee movement in that quarter).

While these exporters have to report mark-to-market losses in their hedging book in this quarter, this should not be treated as real losses. Why? Let us explain with an example.

Assume that an exporter has $100 million export earnings in a quarter and has hedged the full value at Rs 51 per dollar. Since the exporter can settle this transaction by giving delivery of goods, he is not making any real loss here. What he loses in hedging will be made up when he gets paid for the goods supplied.

However, this also means that the exporter will not get any additional benefit from the rupee depreciation. If he had not sold $100 million in the forward market at Rs 51 per dollar, he would have got Rs 57 per dollar.

"Exporters with hedged position will not be able to take advantage of the weakening rupee and, therefore, it is an opportunity loss," says K. Subramanyam, assistant vice-president, institutional clients, Asit C Mehta Investment Intermediates.

The situation remains more or less similar even if the exporter hedges the full year's export earnings. While one quarter's earnings can be settled by delivery, he will have to make provisions for the hedged positions of the remaining three quarters. The exporter will have to report it as a mark-to-market loss in his books.

However, the impact will only be temporary and he will benefit from the weakened rupee once the hedged positions expire. Also, if the rupee strengthens against the dollar in the coming quarters, those losses will become gains. But such mark-to market gains are also notional.

When losses are real

But this is not the case with companies that have foreign exchange liabilities-especially for companies that have not hedged their forex exposure or do not have a natural hedge in the form of export earnings.

"For exporters, it may be more like an opportunity loss, but for companies with un-hedged forex liabilities, it is a real loss," says Ambareesh Baliga, COO, Way2Wealth Securities. Some of these companies may try to avoid reporting it in this quarter's profit and loss account by capitalising and, thereby, directly taking it to the balance sheet. However, the loss still remains and they have to ultimately pay when these loans come for repayment.

The biggest impact of the rupee depreciation will be felt by companies that have taken foreign exchange loans during the last phase of the 2003-8 bull market. A large chunk of these loans are now due for conversion or redemption. More than $3 billion (Rs 17,150 crore) worth of foreign currency convertible bonds (FCCB) are coming up for redemption over the next three months . Since the stock prices of these companies are quoting well below the proposed conversion prices, the lenders may not opt to convert, but instead demand their money back.

Sectoral views

While the stock market has already punished the companies with un-hedged forex loans for this 'real loss', the market was not willing to reward the exporters. Even though the rupee depreciation benefits them, not all exporting companies have witnessed a big rally. There are several reasons for this.

First, export sectors like textiles are already facing a severe demand contraction and therefore, good performance can come only from more stable sectors like IT or pharma. Second, the exporters with hedged positions are not able to reap the entire benefit of rupee depreciation.

"Among the leading IT players, Infosys has the least hedged positions and therefore, will be able to benefit most from the current rupee depreciation," says Subramanyam. Third, the customers are also aware of the depreciation in the rupee and therefore, demand a part of the profit in the form of lower prices.

Monday, June 25, 2012

I have recommended BUY on WPIL twice around Rs.190/- , which is now trading @ Rs.317/- .Today ,company declared very good results for the full year ended March 2012 ,where sales improved from Rs.219 Cr to Rs.361 Cr and net profit improved from Rs.16 Cr to Rs.23 Cr . EPS is Rs.29/- and a dividend @ 20% also declared. Full effect of company's big ticket acquisitions will be visible from this FY onwards .Requesting to HOLD for further gains.

Saturday, June 23, 2012

Like my repeated BUY recommendation on KAVERI SEED COMPANY in last year from a level of Rs.272/- onwards ,this year it is GRANULES INDIA for the fourth time even after an appreciation of about 40 % from the initial rate.I strongly feel this Hyderabad based Pharma company is still ignored by the market participants.This 650 Cr company ( Consolidated) is operating in API’s,PFI’s and Finished Dosages.Last year Granules posted a net profit of Rs.30 cr , a growth of 43 % over previous year. Its turnover showing a CAGR of 28% in last five years which is exactly double of the average industry CAGR in these period.In FY 2011-12 , revenue growth in API division is 20% ,PFI 27 % and FD 83%.Currently company having 6 API products with a production capacity of 18000 TPA ,40 PFI products with 18000 TPA and 14 FD products with 18 Bn .What is really exciting is the upcoming increase in this production capacities where company’s API production will rise by 20% PFI by 200 % and FD capacity by 300%. Granules already made firm arrangements with MNC’s to sell these expanded capacity.Result of this expansion will start to reflect from the second quarter of this financial year itself.In addition to this ,Granules formed a 50:50 joint venture with Belgium based Ajinomoto Omnichem to produce niche low volume high price API’s .This new facility will be completed by the end of 2013 at Visakhapatnam and start commercial production from next FY.Company having an ambitious target of Rs.5000 Cr turnover by 2017.Granules posted an EPS of Rs.14.90 and declared a dividend of 20 % for FY 2011-12.

Currently promoters holding about 41 % stake and FII's and institutions another 35 % .In recent months promoters are aggressively hiking their stake through open market purchases which is another important point to note.

STANDALONE

CONSOLIDATED FULL YEAR

Since company is exporting about 80% of its production ,depreciation of currency is also expected to help the company to improve its bottom line.A clean and transparent management with higher standards of corporate governance makes Granules India a preferred pick from the mid/small cap space.CMP is Rs.110/-

Dicl : I have vested interest in GIL

Tuesday, June 19, 2012

Liberty Shoes Ltd is the second largest shoe manufacturer in India – next to Bata – with a production capacity of 50000 pair shoes per day from 6 units.Its facilities located at Karnal (Haryana) Paonta Sahib (HP) and Roorkee ( Uttarakhand) . Company having wide marketing network consists of 150 distributors, 400 exclusive showrooms and over 6000 multi-brand outlets. Liberty also exporting its products to more than 25 countries across the world.Its main brands are Force 10,Mark Free,Fortune,Coolers,Senorita,Windsor,Freedom, Footfun..etc. After few years of slow growth now company is again showing signs of revival.On a sequential basis Liberty increased its sales substantially in last four quarters.It improved from Rs.72 Cr to Rs.97 Cr during this period. In the latest March quarter company posted a profit of Rs.1.8 Cr . Here an important point to note is that , there was an extraordinary one time expense of Rs.3.23 Cr provided in this quarter.If we exclude this amount ,NP will be more than 500 % compared with last year same quarter and more than 100% from December quarter.Now company is planning ambitious growth ahead.It is decided to merge its retail subsidiary LibertyRetail Revolution with Itself .For the next 3 years company having plans for expansion worth Rs. 500 Cr .Methods for fund raising not announced so far but indicated the chance of P/E funding route.For the last one month, its share price move from Rs.90 level to Rs.125 /- But after shifting the stock to ‘T’ group , it now corrected sharply and trading around Rs.95/-. Medium to long term investors may consider an entry at this level.

Saturday, June 16, 2012

Vadilal group originally started its operations in Gujarat way back in 1907.Now its flagship company Vadilal Industries ( BSE CODE - 519156) is the second largest Ice Cream maker in India.Company is also a dominant player in frozen vegetables , ready to eat snacks, curries and breads. Company is producing Ice Creams in 150 plus flavors and they are sold in a variety of more than 250 packs and forms. The range includes cones, candies, bars, ice-lollies, small cups, big cups, family packs, and economy packs.Vadilal operating two Ice Cream manufacturing plants ,One in Ahmedabad and the other in Bareilly.After the recent capacity expansion at a cost of more than Rs.100 Cr ,it manufacturing capacity reached at 375,000 lpd from 225,000 liters per day .After this capacity expansion Vadilal is now eying new markets beyond their traditional markets of Gujarat and Rajastan (excluding southern states and Mumbai and Goa). Its marketing arm is establishing ‘ HAPPINEZZ ‘ Ice cream parlors through own and franchise route. 200 such retail outlets already in place and is planning to double it in next two years.Vadilal also planning to add 3,000 retail points-of-sale in Uttar Pradesh alone, in addition to the 10,000 such points across North India. Last year company introduced four varieties Badabite, Flingo, Gourmet and Ice Trooper in premium segment .Indian Ice cream market is worth Rs. 2,500 crore with an annual growth rate of 18 per cent. Considering the fact that the average consumption of Ice Creams in India is just 300 grms a person per year where it is 24 litres a person in several developed countries , the potential is very big for this business.Vadilal is a well known brand with sufficient infrastructure in a business where establishing and maintaining a large cold chain is not an easy task for any new entrant. Moreover Vadilal is the company with lowest supply cost even compared with Multinationals.

As part of utilizing the full potential of its cold chain ,company successfully extended its brand to Frozen vegetables,Fruit Pulps,Parathas,Fruits,Ready to Serve Foods ..etc under the brand name ‘VADILAL QUICK TREAT’ .Even the current market size of these non ice cream products are limited ,company received very good response for these items from where it launched and planning to extend its market reach for these products too.Growing non ice cream sales will also minimize the impact of seasonality of operation in its business where more than 75 % of sales is currently from a single quarter ( March- June) due to the effect of summer.This change in trend is visible in latest March quarter where company posted profit after many years.Only negative about this company is its high leverage due to the debt raised for recent capacity expansion.But even after providing the cost for this , company is generating decent profits. Promoters are now planning to reduce debt with some dilution in equity.Since the company having low equity considering its size of operations and large promoter stake some dilution will not create any problem but ease its leverage to a large extent. Currently Vadilal is one of the lowest valued FMCG player .

For the last financial year ,Company posted a sales of Rs.285 Cr , net profit of Rs.6 Cr and an EPS of Rs.8/-Considering its brand value,potential of the business and chances of benefits from recent capacity expansion Vadilal Industries is a company to perform well in future .An earlier de leveraging is a catalyst to re write its current valuation and any delay/shortfall in Monsoon may act as an Icing on the cake for the short to medium term.Trading both in BSE and NSE @ CMP is Rs.105/-

Saturday, June 9, 2012

United Phosphorous India’s largest Agrochemical company is trading @ Rs.111 which is close to its multi year low.Recent crash in share price is mainly on account of the CCI order against the company . CCI has levied a penalty of Rs. 252.44 crores on the Company for alleged violation of sections 3(3)(b) and 3 (3) (d) of Competition Act, 2002.UPL is a 7500 Cr company with operations in more than five countries and generating 75 %of its revenue from outside India.On a global level it is one among the largest five generic agrochemical makers.Company selling Insecticides,Fungicides,Herbicides,Rodenticides,Plant growth Regulators and Seeds under various brand names in USA,EU, Latin America and India.Last year company made two large acquisitions in Brazil - Sipcam Isagro Brazil and DVA Agro Do Brazil.Since Brazil is one of the biggest markets for Agrochemicals ,these acquisitions is expected to bring good result to UPL on completion of the business integration.In last FY , company posted a turnover of Rs.7654 Cr ,net profit of Rs.555 Cr and an EPS of Rs.12/-. Recently company announced a buy back of its shares with a maximum price of Rs.150/- share. Now company informed that it is taking steps to file appeal against the order of CCI before the Competition Appellate Tribunal.All negatives in this matter is already reflecting in its current price and any positive outcome from the Appellate Tribunal will boost its share price .Moreover the buyback will also act as a cushion from further fall in share price . I feel the current difficult time is only temporary and company will come out of it soon and hence it is the best time to enter in it at current market price of Rs.111/- with a long term view.

Thursday, June 7, 2012

"You will either get good news or you will get good prices," says Madhusudhan Kela, Chief Investment Strategist with Reliance Capital, on why investors should take advantage of the current bearishness in the market to accumulate stocks.
In a free-wheeling chat with moneycontrol.com, Kela advised investors against trying to time the market, and instead focus on companies with good balance sheets to ride the next bull wave.
"I think the market looks good; if the news is so bad, then the prices have to be attractive," says Kela who formerly headed the equity division at Reliance Mutual Fund. But there is a rider: Investors have to take a two-year view at the very least, there is no quick gains to be made in the short run.
The benchmark 30-share Sensex is down 13% over the last year, and is now trading at roughly 13 times one-year forward earning, compared to its historical average of 15-16 times. Yet there have been phases when the forward earning multiple had shrunk to as low as 10 times.
So what makes Kela so bullish when the economy is going through one of its worst crisis in two decades, and companies are grappling with high interest costs and a weak rupee?
"I think most, if not all, companies have learnt their lessons well from the mistakes of 2008 when they let their ambitions get the better of them. Aggression was the buzzword then; now everybody is talking about consolidation," says Kela.
"Companies are getting out of non-core areas, selling assets, cutting costs and focusing on their business models," says Kela referring to stake/asset sales by companies like Pantaloon Retail, Suzlon and many property developers. This, he says, will improve profitability over the next year or two.

Kela is betting on the three events boosting sentiment in the coming months: policy action by the government, falling crude prices and softening interest rates in India.
"History shows that the government responds with strong measures whenever a crisis has reached a point of blow-out. We saw that in 1991, and we could see similar response now," says Kela.
GDP grew at a nine-year low of 5.3% in the March quarter, and economists estimates for FY13 range between 6.0-6.5% even as the government feels the figure could be closer to 7%.
The steep slide in the rupee, high import bill and drying up of capital flows are pressuring the country's dollar reserves and India now has reserves to pay for little over seven months of imports, the lowest level in 12 years.
Kela feels that currency could act as a catalyst for repairing the widening current account deficit, referring to the decline in gold imports. "Had the rupee not depreciated, gold should have been at Rs 24,000 and not at Rs 30000 (per 10 grams). And that is making a difference to demand," says Kela, adding that the weak rupee would also improve the competitiveness of many Indian exporters and attract more dollars into the country.
Kela's optimism on exports is in marked contrast to former Commerce Secretary Rahul Khullar’s grim projection of export growth halving this financial year.
Kela is bullish on financial services as one of his main assumption for a recovery in the economy and the stock market is interest rates falling.
"When interest rates fall, rate sensitive companies will the first one to benefit. I am bullish on financial services followed by capital goods and infrastructure companies," says Kela.
But he does not expect a secular bull run in these sectors like was the case during the boom in 2007-08.
"In 2000, you had over 400 IT companies with nothing much to differentiate one from the other. Today, you can't recall more than 10 companies, and only five of them are the really serious players. Same will be the case in most sectors going forward," says Kela.
The ongoing slowdown has led to a sharp drop in capacity expansion, and when things start looking up, there will not be enough capacity, he says. This combined with balance sheet clean-up and cost cutting, will improve profitability and Return on Equity (RoE) over the next 18-24 months.
"A handful of companies, be it capital goods, infra or any other, will make disproportionate profits compared to the rest, and the winners will be all about strong and clean balance sheets," says Kela.
He is bearish on consumption plays like fast moving consumer goods. "Valuations as high as 40-50 times forward earnings in some cases are unsustainable. Rising inflation will at some point hurt demand, and investors will start questioning valuations. Already, prices of many FMCG stocks have corrected over the last week or 10 days; at least the uptrend appears to have stalled for now.
This is an important technical indicator that money is ready to move out into other sectors promising better returns," says Kela.
This is the money manager's advice to investors who are undecided on whether or not to invest in equities in present market conditions.
"If you have done your homework, have a reasonable return expectation, and a 2-3 year perspective, the risk-reward ratio at the moment is extremely favorable. Forget about trying to catch the bottom, because markets will always anticipate a recovery in the economy."
Kela admits there are downside risks to his assumptions. "There could be a catastrophe in the Eurozone, and/or the government may continue to be indecisive," Kela says.

Sunday, June 3, 2012

I have recommended Sugar sector stocks in January and thereafter most of the recommended scrips gained over 60 % .But now these stocks again corrected sharply in recent times .After my previous posting ,some favorable developments happened in this sector like permission to export sugar under open general license,depreciation of rupee, slightly improved realisation from local sale,appointment of a committee to study and recommend the possibility of a sugar price decontrol..etc.All together I believe it is again the time to consider stocks from this sector with a long term view and hence repeating my old recommendation

I know, many of you will not support an idea of buying the shares of companies from sugar sector at this point of time.Yes, there is lot of negatives like lower sugar price,high interest burden,excess government control ...etc.But we can't ignore the fact that all these negatives and more are reflecting in the stock price of each and every sugar company. Most of them are trading at their 5 to 10 year lows and such a situation is surely an opportunity to buy these type cyclical stocks at rock bottom prices for investors with patience.Sugar companies are currently going through rough weather mainly because of lower product price worldwide .But this situation is expected to reverse in one year due to lower production.( Generally it is the nature of many agri commodities) .The expected rise in crude prices going forward may also influence the sugar price positively in coming years.Whenever the crude price moves higher and sugar price comes down large manufactorors like Brazil will surely give much preferance for the production of Ethanol over sugar and such a situation will create lower supply situation of sugar in world markets.Moreoevr the current worst situation may lead to the closure of many small sugar mills and the chances of a consolidation in this industry is very much.The most important factor at this point of time regarding the sugar industry in India is the high probability for a reduction in goverment control in this sector.Chances are very high for some favourable developments in this direction after the upcoming state elections.All together, I feels many sugar companies are value buys at current market price for a genuine investor with long term view.Consider at current market price , Shree Renuka @ Rs.26/- , Rajshree Sugar @ Rs.32/-,Dhampur Sugar@ Rs.31/- and Thiru Arooran @ Rs.70/-